COVID, Divorce, Death & 401(k) Distributions: Don't Discount the Devilish Details
Partner, ERISA Attorney
Boutwell Fay, LLP
Sherrie Boutwell has focused for thirty years in the areas of employee benefits law and ERISA, with an emphasis on retirement and deferred compensation plans. She advises and counsels a broad range of clients, including employers, employees, plan fiduciaries, financial institutions, government agencies and trade associations, on a wide range of employee benefits matters. Sherrie has extensive experience and is a highly sought after speaker and writer on employee benefits topics.
Sherrie has represented clients before the Internal Revenue Service, the United States Department of Labor, the Pension Benefit Guaranty Corporation, arbitrators from the American Arbitration Association and the United States District Court with respect to employee benefits issues. Sherrie has experience working with the unique deferred compensation issues that arise in the non-profit and governmental employer arena and also has many years of experience in the design and operation of non-qualified executive deferred compensation plans including the requirements under Section 409A of the Code.
Sherrie takes pride in bringing a practical and down to earth approach to resolving complex benefits issues involving qualified plans, non-qualified plans and health and welfare plans.
Recap, Highlights, and Thoughts
I hope this episode finds you safe and healthy during these crazy times. This episode had a lot of twists and turns to get to you. My guest today, Sherrie Boutwell, ERISA Attorney with Boutwell Fay and I had planned this originally as a conversation about some of the trickier distribution scenarios employers face and what to do about them. As things unfolded, we felt it would be helpful to include some commentary on the new COVID related distribution and loan options. So, we start with COVID related topics and then pivot to some of the trickier distribution options that relate to divorce, death and hardship requests.
Before we get started, with many conferences and other traditional sources of information for people postponed or canceled, I would please share the podcast with your friends, colleagues or within a professional group or with anyone who has an interest in the key topics and trends to managing 401(k) plans. You can send them to 401kfridays.com or suggest they search 401(k) Fridays on their favorite podcast app.
That’s it, I hope you enjoy my conversation with Sherrie!
Sincerely Your Host,
NEW: Episode Transcript
Rick Unser (00:00):
Well. Sherrie, welcome back to the podcast. It's been awhile. You were one of our first guests and now I am really excited to delve into the devilish world of distributions, all sorts of fun stuff that maybe don't quite happen every single day in a retirement plan. So thanks for being here.
Sherrie Boutwell (00:19):
Oh thanks. Thanks for having me back. It's good to be back.
Rick Unser (00:22):
Well, just because it's top of mind with pretty much everybody when we talk about distributions these days you can't do that without talking about the new coven related distributions. So I guess from a high level, what are they, what questions are you getting from employers at this point? What's good for people to know about these two new distribution options that have popped up here?
Sherrie Boutwell (00:48):
Sure. We are getting a lot of COVID 19 questions particularly about the distribution and also the loans. A covert 19 distribution is a new brand new type of distribution. We've only had it a couple of weeks now that was enacted as a part of the cares act and it allows certain plans to make inservice distributions or post-termination distributions with very special tax rules. The distribution, first of all is not subject to the 10% early distribution penalty. If you're under 59 and a half, even if it's a lump sum distribution, you don't have to have the 20% mandatory withholding. You're under more of an elective withholding and you can pay it back within three years. So this is a very favorable type of distribution that's now temporarily allowed. It is temporary, it doesn't last. This opportunity to take a coven 19 distribution doesn't last forever or really only through the end of this year.
Sherrie Boutwell (02:00):
So you know, here we are is that kinds of issues that we immediately started hearing from our clients who are mostly employers had to do with, I just got this notice from my record keeper and I have 48 hours to respond. What do we do? And the record keepers, to their credit, you know, jumped on this, got out guidance, gave options, some of them gave more notice turnaround time than others. And that's appreciated certainly from the legal counsel side, but the types of things that the employers are weighing are, should we allow this? Is this something we even want to allow because it is optional. It's not a mandatory situation. It's really up to the plan sponsor whether they want to allow this and to the extent that they want to allow it. So committee meeting on Monday, there was a lot of back and forth.
Sherrie Boutwell (03:04):
Are our employees going to take money out cause we've also had this crazy market volatility of the last month. Are they going to take distributions when their account balances are low and miss out on a recovery? Are they going to take it when they don't really need it? And we can talk about that process and if we're going to allow this, what do we want to allow? Do we want to allow the full dollar amount? Do we want to limit this to only elective deferrals, elective deferrals and rollovers or employer money as well. And for many employers, you know, why do we even need this? We have hardship distributions already. We have loans already. Why should we add this now? So I'm just going to stop right there and see if you have any questions about that.
Rick Unser (03:58):
Yeah, all good points. And definitely things that I'm hearing from my perspective as well. Let me come back to two things you said. One, you said most plans and I just wanted to get any clarification on when you said these new distribution options are available in most plans. Is that most defined contribution plans or are there any types of, you know, workplace retirement plans where this wouldn't be available excluding like pensions and stuff like that. And then secondly, I saw something the other day that I don't know if this is accurate or not, but, but I felt like somebody was saying in the media in general that Hey, even if your employer doesn't elect to do the cares distributions, you can still take one. And I'm just curious if you've seen that or or know how that might be possible in this current world or if that's just maybe plain wrong.
Sherrie Boutwell (04:53):
Well, for an employer sponsored plan, no, I don't think that you can take a coven 19 distribution just because you want it. Your employer really asked to authorize an eventual amendment to allow it. The types of plans where we know it's allowed our 401k plans for three D plans and governmental four 57 B plans. However, a nonprofit four 57 B plan, which is essentially a top hat plan. They are not eligible for this type of distribution. And there is some question about what happens. For example with a money purchase pension plan that's a little bit up in the air, whether if you're over 59 and a half you could still take one of these. But certainly from everything I see and I'm reading, if you're going to need money to get through this crisis that we're in, this probably one of the best options that you have other than loans.
Sherrie Boutwell (06:02):
And I have seen a back and forth in the press about whether or not the deferment of loan payments, which you know, if you don't make a loan payment and you have a themed taxation event or ultimately a deemed distribution when you have a distribution event becomes a distribution. So I have seen this back and forth about whether employers have an option or not on the loan side, but I haven't seen anything suggesting that if your employer doesn't authorize this, you can somehow get it for yourself. Maybe if it's, you know, from an IRA, but not from an employer plan.
Rick Unser (06:41):
No, that makes sense. And I think as you were chatting there, you were making some really good points about what choices employers have at this point in time. And I'll say I've had the vast majority of people that I've been talking to say we're going to implement it, we're going to go to the max on what's allowed. But I have had a few people and I, I mean, I kind of liked the thought process, which is saying, Oh, hold on a second. Let me just do the math here real fast. If assuming somebody has the balance, we allow them to take a loan of up to a hundred thousand dollars they can defer their payment for a year. Now they've got five years to repay that loan and that's roughly $2,000 a month or $1,000 a paycheck, arguably that somebody is having to pay back. And for some employers they're kind of scratching their head going, Hmm, are we potentially just setting our folks up for failure if we give them that as an option?
Sherrie Boutwell (07:49):
Right. And some plans don't allow loans or they have a cap on loans, you know, somebody may have already hit the cap of one or two outstanding loans so they don't have that option. Their option is, you know, either what I'll call a regular distribution, which would be termination of employment and we'll come back to that attainment of a specified age if that's in your document, a forced cash out. You know, there's a lot of ways, a lot of things that can trigger a distribution, including a regular, I'll call a regular hardship. But these covert 19 distributions, you know, the tax consequences are very favorable for certain people. And so I also have seen questions about, well, if we already took an inservice, maybe back in February, you know, you already needed an inservice distribution and it was allowed. Can you now sort of recharacterize it?
Sherrie Boutwell (08:51):
Those questions also are coming up. So just to circle back on termination of employment, because this is a question we're also getting, when do you have a termination of employment? A lot of employees right now have not been formally terminated. They're either working remotely, they're on a paid or an unpaid temporary furlough, and they haven't actually had their employment terminated by their employer. There's an open question. Honestly, in our firm, we've kicked it around about when does a temporary furlough result in a severance from employment that triggers, for example, a 401k plan to be able to make a distribution. And I think we could use some guidance on that. On the 401k side, there is some law on the labor and employment side. It's not specific to retirement plans that if you put someone on a temporary furlough for more than 10 days for other purposes, it's deemed a severance of employment.
Sherrie Boutwell (09:57):
I'm not saying that's true for 401k's, but those sorts of factors and what ultimately happens with a furlough, it may be hard to tell sometimes when the furlough turned into a severance, unless the employer is being very proactive and working with their counsel to figure those sorts of things out. Because I suspect I'm here in orange County, close to Disneyland, so I'm watching what's going on. You know with them, they've got people on paid leave now they have some people that are not going to be on paid leave. At what point are people actually laid off? Sometimes it's clear, sometimes there may be, could be a deemed severance, you know, at some point.
Rick Unser (10:42):
Yeah, and the other thing that that plays into is this whole concept of do you have a partial plan termination based on somebody being on furlough or a group of people being on furlough for a certain period of time?
Sherrie Boutwell (10:55):
Right. So certainly true. There will probably be a lot of partial plan terminations coming out of the situation that we're in today. If more than 20% of your participants lose their jobs and lose festing, you need to definitely, you know, consider whether you've had a partial plan termination, even if it's as few as 10% you want to at least start looking at the facts and circumstances. But hopefully, and this is the true hope, is that this is very temporary. These folks come back, they still get their full year of service this year even though there's some temporary furlough. So that all, we'll just have to see how that plays out over the next few months. If a lot of people come back to work and they don't have a break in service and they get their vesting, you know you probably didn't have a partial termination.
Rick Unser (11:49):
Perfect. And getting back to some of the coven distribution things you were talking about, what other concepts or what other parts of this do you see employers struggling with either in concept or in philosophy around making these available or, or potentially not making these available within their plans?
Sherrie Boutwell (12:12):
Well, one question that we are getting employers are struggling with and I know that treasury is aware of and you know also thinking about is if you don't lose your job but your spouse loses their job, does that result in you being affected for purposes of coven 19 because there's a description of a participant has to either be sick or lose their job. You know there's some criteria you have to meet. You can't just walk in and say, I want a covert 19 distribution and the participants will need to self-certify that there they meet those eligibility requirements. Treasury's been given regulatory authority to add to that list, but right now that list does not include my spouse lost their job. And you know, you can imagine if your spouse was the biggest earner and they lost their job and you're going along here with your little 401k, you might've had a very bad adverse effect, but technically you can't get the covert 19 distribution from your plan unless we get some guidance from treasury, which I've seen from Steven tag me that they're looking at that, they're aware of that issue, that that may be a common reason why somebody could really need the money but not be eligible for this distribution.
Rick Unser (13:38):
And not to totally split hairs here, but let's just say that situation arises and you have the spouse applying for a Cova distribution whose spouse was laid off and they go through the process and they self-certify that they're eligible for this distribution because they meet the definition of a qualified person under these new covert rules and no changes made and the IRS comes out and says, that's not acceptable from a plan sponsor standpoint. They're good. Right in that they can rely on the self-certification of the participant in their plan.
Sherrie Boutwell (14:24):
Well you know the devil and we did talk that this was going to be a devilish conversation. The devil is in the detail. So let's just talk about how this has worked in the pre, coven 19 world. If you are having self-certification of irregular hardship, the employer can rely on that self-certification as long as they don't actually know that it's not true. Right. So they would to have some actual personal knowledge to know that this is not okay for coven 19 I suspect the rules will just be the same as long as the employer doesn't have some reason to think that the self-certification is fraudulent or you know, just not accurate. They should be able to rely on it. And then your plan qualification, you know should not be at issue. But again with regular hardships there is a requirement that the participant maintain the records of the hardship.
Sherrie Boutwell (15:27):
So you want to make sure that you've got accurate disclosures and agreements from participants. Yes, we're going to maintain the records. And my thought about covert 19 the other sort of tricky piece here is they've said you don't have to give a forward to F notice telling people about rollover rights, but I still think you have to give some notice and I would think you would want to make sure that there's some sort of disclaimer from the plan administrator. We're not giving you legal advice, we're not giving you tax advice and you know, be aware if you sell certify and it turns out that you weren't eligible, you know there could be adverse tax consequences. And I think if the employer is covering its bases in that way, you know they're in a very strong position both with the IRS as to plan qualification and as to the participants as a Hey, you didn't tell me, you know you had a duty to tell me and you didn't tell me kind of claim.
Sherrie Boutwell (16:31):
But I just saw the first, actually I haven't looked at it yet. I saw that a notice a draft covert 19 that distribution notice came out from one of the document companies today. I'm going to sit down and take a look at it tonight and see what I think. But this is all happening very quickly. You know, as we talked about and rightly so, people are hurting. The intent of the legislation is, Hey, let's make money available to people that need it today. So I just would be surprised if from any sort of enforcement standpoint, the regulatory agencies take any sort of a tough stance as long as people are acting in good faith and acting reasonably.
Rick Unser (17:16):
Yeah. And I think you said a couple of really good things there. One, I think what you said about some of that language in the notices makes a lot of sense because in real time what's going on is people are either making negative or positive elections about what they want to do in their plans with these new cares act provisions and then what's going to follow that are going to be notices or other type of communication packages that will be going out. So I think that's good process to insert for people to think about that or give some thought to what those notices look like. Or if they're going to communicate on their own and not wait for one of their service partners. Just be aware that you might want to include some language in there on your own. And secondly, I would agree with you that things had been moving really, really quickly. I mean there's some providers that just do a simple plan amendment. They want four to six weeks to make that happen. And now we're talking about implementing completely new distribution options that require massive changes on a system level, on a training level, on all sorts of levels. And we're talking about getting that done in potentially less than two weeks. So, you know, w what do you compare and contrast some of that? It is pretty amazing the mountains that people are moving behind the scenes of these record keepers to make this happen.
Sherrie Boutwell (18:42):
Yeah, absolutely. The other thing to think about, a couple of things. One, I would encourage everyone to pay attention to who's going to do what to administer this. Some record-keepers, as I've seen, are willing to look at the a hundred thousand dollar limit within this plan. Others have actually said, we're not. We can't even do that when you know we're not going to be able to get the programming in place and it's going to be on you employer to do that. So for employers that went was the defaults, you know, pay attention to what do I need to do now to set up the process to administer this on my end? How much am I going to do if I've got a record keeper, what's the record keeper going to do if I have a TPA, what's the TPA gonna do? What do I need to do payroll wise?
Sherrie Boutwell (19:33):
How am I going to implement it and what part is on me and what part is on them? Because what I've seen are, you know, here's an amendment to our service agreement. If you go with this, you're deemed to consent to this. We're not even waiting for signatures. And also we, the record keeper are in some cases they're making decisions. We're amending our plan to allow X, Y, Z. You don't even really going to get an option about this. And so employers, I know from my experience in dealing with HR departments over the last two weeks, you know they're scrambling not just with this, they've got a hundred other issues on their plate at the same time. And I do have a concern that some folks didn't even notice the emails. They said, Oh that's for the 401k. I'll read that next week and the deadline has already passed. So that could be an issue going forward. If they come back to that email this week and say, well now I've missed the deadline. My guess is if you call up your record keeper, a lot of them are going to be able to work with you. But the further we get down that road, the harder that's going to be. So if you haven't opened that email me record-keeper now would be the time.
Rick Unser (20:50):
Yeah. The further further the train gets out of the station, the harder it is to bring it back.
Sherrie Boutwell (20:54):
Exactly. And as you said, which is what I'm hearing as well, you know the next step are the record keepers. Everyone's working now on the participant communication piece. They kind of think they have figured out who's in, who's out. Although one other point, and this if you're still in an election period, you may want to think about is doing this in stages, you know, allow this amount of money from these sources of funds today and see how it goes. The record keepers, as I understand it, will generally allow you to add additional sources of money or change this, make it broader going down the road and we just don't know where we're going to be in a few months. So there may be a sort of a step by step process that employers can implement if they want to go that direction.
Rick Unser (21:49):
No good thought. Let me pivot you to the loan side of this. I know you mentioned a minute ago just some issues about if you have a limit on your loans and people have already exhausted those, then they wouldn't be able to take it covert loan unless you change some provisions. Are there some other things around loans and or the new coven loans that people should be thinking about or keep an eye out? Similar to what you talked about on the distribution side?
Sherrie Boutwell (22:18):
Well, the thing I would say on loans is a, make sure you're looking carefully at your loan policy because most plan documents are not going to have a lot of these loan restrictions. You know, usually they just sort of incorporate by reference the loan policy. And in some ways that's good news, right? Because if you don't have to do a plan amendment, it's so much easier to change a loan policy than to get in a plan amendment. But on the reading I've done the implementation and the thinking about loans is a little more complicated, right? Because they're just a lot of moving parts with loans and I think it's another area where we're just going to need some guidance. There's going to be a lot of issues. I think more issues actually with loan than with the coven 19 distributions, which I think we'll all get, you know, we'll get figured out.
Rick Unser (23:17):
And what are a couple of those issues that you might see pop up that are unique to loans versus the distribution side?
Sherrie Boutwell (23:25):
Well with respect to loans, for example, one question that I'm not clear on, I don't know that anyone in our firm is, we're having, as you can imagine, we have seven benefits lawyers and we have a lot to talk about every day here with all of this. For example, what happens if somebody has a loan and they go into default? Well, normally that's not a distribution, right? They are. There has to be a distributable event, but what if they go into default and then they have a distributable event hand that now be treated as a coven 19 distribution or are they stuck with loan treatment? I don't have an answer to that.
Rick Unser (24:12):
And the significance of that would be they could take the tax consequence over three years and avoid the 10% penalty if they're under 59 and a half.
Sherrie Boutwell (24:21):
Well, I don't think for a covert 19 and a 401k it's going to matter if they're 59 and a half or not.
Rick Unser (24:28):
Yeah, no, that's I'm thinking is it versus if the, if it wasn't a Cova distribution, then if they were under 59 and a half, their amount that they defaulted would be considered a 10% penalty if they're under 59 and a half. So if they can somehow get it qualified as a coven distribution, then maybe they avoid the 10% and maybe they could take the taxes over a three year period versus in the year of default.
Sherrie Boutwell (24:55):
Right, exactly. So for example, under Katrina, you know there were certain types of things that the IRS gave guidance and regulatory relief on. I know they're working on that sort of thing now, and I think most of the lawyers that I know are looking to the guidance that came out about Katrina disaster relief to get guidance on how to interpret some of the coven 19 distributions and loans. And let me just circle back to plan amendments because I do want to make sure we talk about that. The cares act allows an extended period, remedial amendment period to get amendments in place for these coven 19 distributions, loans, et cetera. However you will need to know how you're going to implement it and keep a record of that so that you get the amendment right when you have to do the amendment here, you know, in 2022 and then the other piece about amendments is even though there's an extended remedial amendment period for these distributions, if you're looking to freeze contributions, there's no extended remedial amendment period for that. And if your allocations or contribution accruals are based on a thousand hours, it's April and many employees will be starting to hit a thousand hours if they haven't been laid off or furloughed. So it's important if you think you're going to need a plan amendment to really pay attention to that right now. What do you need to amend and do you have an earlier deadline for other reasons other than just implementing, you know, a Cove at 19 distribution option. That's what I want to make sure I got out.
Rick Unser (26:47):
Awesome. Before we pivot away from coven and the related distributions in loans. Well I guess we should probably hit on RMDs if you've got anything that you think of interest or importance to, to chat about on that level.
Sherrie Boutwell (27:03):
No, other than I think that's not optional. It seems that the RMD waiver is what it is. At least that's the consensus that I'm hearing in my world so I'm don't be forcing arm views right now. That could certainly be an issue, especially with the market where it is. The other thing to think about though, you know with few people being laid off in a downmarket, you know, pay attention to what has always been a problem. This is something we probably would have talked about apart from coven 19 that is the forced cash outs. You know, a lot of plans say if you have less than 5,000 in your account and you terminate, we're forcing you out. But then in our experience that may or may not be followed in operation. So definitely pay attention to that. The other thing that I'm hearing that is distribution related and related to the circumstances under covert 19 as opposed to, so legal changes under code 19 I hear that the divorce lawyers are just gearing up because everybody's staying at home together.
Sherrie Boutwell (28:21):
And in fact there was, I heard this, I haven't verified it. There was some data from China that in fact the divorce rate in mom went up after a stay at home. So it's probably a good idea to look at your QDRO procedures, know how to handle a QDRO. Our firm does a lot of fixing of things that happen that go awry. And ironically in the last two years, we had two different plans where they had changed record-keepers, but somehow the QDRO information didn't get transferred over during the recordkeepers switch. So when the person terminated or died, in these cases, money got paid out to the current spouse, which was subject to QDRO from spouse number one. But current record keeper didn't have a record of the QDRO. So, you know, pay attention to QDROs. And in those cases, you know, sadly it was where someone had died.
Sherrie Boutwell (29:24):
Again, this is a really good time to go out and clean up beneficiary designations. It's something that a lot of people are looking at their estate plans. I've, I've actually heard from some estate planning lawyers who were getting very creative, trying help people, elderly people in nursing homes who can't have visitors but want to update their estate plans on their beneficiary designations. You know, mortality is on everyone's minds right now, but beneficiary designation, the lack thereof. Some plans have not been great about keeping those records. Some I've seen are very unclear and you know, others just, they just tend to Linn to disputes. So cleaning up beneficiary designations right now or in the near future also might be something people want to think about.
Rick Unser (30:21):
Yeah, and I think that takes us back to our originally scheduled program that we were contemplating when we were, when we were talking about this a few months ago, which was there's some really complex things that happen that might not happen every day, every week, every month, every year in plans. And they can really throw some people that are being asked to make decisions, are being asked to administer these types of things in retirement plans can make it very complex and it can also bring some, some risk into the equation. So I guess maybe let's start with divorce cause I, it's funny, I was on a webinar earlier today where somebody was joking about that and kind of halfheartedly about, well, you know, we might be getting a divorce lawyer here in the near future based on how much time I've been spending with my spouse. But in reality, I, I know that divorce gets messy in a lot of different ways. And I think you mentioned QDROs, which I believe are related to divorce. So can you maybe define that and then talk a little bit about how someone who has assets in a 401k plan or defined contribution plan, how that impacts things when they get divorced?
Sherrie Boutwell (31:36):
Sure. So a QDRO, and that's an acronym for a qualified domestic relations order and it's actually an exception in the law. Normally qualified retirement plan money is not subject to assignment alienation creditors, but for the exception that was written into the statute and the statute says if there is a qualified domestic relations order, then you can pay out and it will not violate a ERISA or violate the income tax qualification requirements for the plan. So when people, you know, split up in a marriage, often the retirement plan is one of the biggest assets. You know, in an ideal world you would just allocate it to one spouse and not have to split it up. But often that's just not practical when you're really trying to split assets. So the method to divide up a retirement plan benefit is a QDRO. And where we often see issues come up with QDROs is either someone doesn't know about it, which is a problem because if you pay out spouse number one and spouse number two how to QDRO, now you've got an overpayment to spouse one monies owed still by the plan to spouse two or vice versa, spouse one and what you're going to do.
Sherrie Boutwell (33:07):
So it's very important that QDROs be managed carefully, including the approval process. You know, most of the recordkeepers now has a little checklist that you can use that's not really a substitute for having a lawyer look at it. But you know, a lot of the times it will work out with even without counsel. But plans are also required to have a written QDRO procedure. And another area where we often get called in is either there is no QDRO procedure or there is a QDRO procedure, but it doesn't really address what happens if you're not approving the QDRO. Let's just say the QDRO, you know, has some either vaguery, often it's vague, you just can't tell what you're supposed to do or it calls, for example, for a form of payment. Maybe the spouse wants installments and the plan only allows lump sum distribution. Well, you can't force a plan to do something that it doesn't allow, but your QDRO procedure needs to have in the procedure.
Sherrie Boutwell (34:20):
A way to say that's not a QDRO, which in our view is also a benefit claim denial under ERISA, which you now need to give notice that they can appeal that decision. That's our view. I'm not sure everyone agrees with that, but it's probably the conservative view. And so when there are QDROs there are always opportunities for things to kind of just go, go sideways. Plus you've got people that are in the middle of a divorce, they're typically under a lot of stress. Emotions are running high and that's, you know, usually not good for the plan sponsor employer when people are feeling very emotional about things. So that's kind of my thought about QDROs.
Rick Unser (35:03):
And are there things that an employer should be looking for specifically or maybe anything that you would say, Hmm, if you see this, then call an attorney, raise a flag or do something other than just say, yep, good to go.
Sherrie Boutwell (35:23):
I would say the things that would lead someone to call us to help them review a QDRO, you know, some clients have us review every QDRO some point, have us review, no QDROs. Some clients have us review some QDROs and the QDROs that they would have us look at. Our often vague, you know, some divorce lawyers are, are handing a lot of things off to the paralegal for example, to put together a form, use a form and they're asking for things that it's just you don't have the information that you need or they're asking for something that you just, you know, your record keeper just can't do. In terms of splitting up accounts in odd ways or allocating earnings in odd ways, you know, you've got to live with what your record keeper can do and what your plan allows. And a paralegal in a divorce lawyer's office may or may not be reading your plan carefully or thinking about those questions. Also, you know, once you get notice of a QDRO, there's the issue of, okay, you got this, did you put the account on hold? Right, so that the participant, while the QDRO is being evaluated can't come in and, and withdraw the funds that it potentially subject to a QDRO. I would say work with your record keeper on that and that whole language needs to be in your QDRO procedures because when a person comes over the QDRO, you're supposed to give them the QDRO procedures that would put them on a notice about that.
Rick Unser (37:02):
Perfect. The other thing you mentioned, and I think there's equal or potentially more complexity, is this concept of beneficiaries and you know, Hey beneficiary forms. Sometimes they're there, sometimes they're not. It's just an unfortunate reality of the world we live in and when people pass away, it's a little tough to to reconstruct things sometimes. How does that work and what are you seeing that that get plan sponsors tripped up maybe if there is a beneficiary form and then if there isn't.
Sherrie Boutwell (37:37):
Right. So a couple of things and let me just mention one other aspect of this that we don't see very often, but with COVID-19 going on and an aging population, I expect we will see more and more of it. And that has to do with just capacity, right? If somebody is very ill or has dementia, they may not have capacity to designate a beneficiary. They may not have capacity to request a distribution. And so I think we are seeing an increase in questions where someone for example a spouse or someone comes in with a power of attorney or no power of attorney and says my spouse is unconscious in the hospital, I want to pull money from the plan. Right. So at that point you really I think do need to get counsel involved and evaluate the power of attorney or the request that's being made not by the participant but by somebody caring for a participant.
Sherrie Boutwell (38:43):
So that's one thing I just want to mention. And then in terms of beneficiary designations where we see often problems are a, there is no beneficiary designation but that the plan or the participant has, but the death beneficiary is claiming that you know there was a beneficiary designation. The other is you've got a trust named a, you know a family trust, some sort of trust named as the beneficiary. And did you have good spousal consent if you needed it for a non spouse beneficiary. Typically in a 401k plan you do, which raises yet another co-fund 19 problem. And that is, I've seen a number of plans move from spousal consent on a beneficiary designation to we're only going to accept notarized spousal consent. We the plan representatives don't want to be responsible for witnessing beneficiary designations. For example, as a trust. And right now it's very hard to get a notary, you can't in California have what's called a remote notary.
Sherrie Boutwell (39:58):
There actually has to be a person to person. So you may need to help out your participants with remote notaries coming to their home, social distancing, you know, safe practices to get a spousal consent notarized. Then with respect to beneficiaries, we definitely see, especially if it's a good sized account balance. There was no, this was one we just recently worked on a client with. There was no beneficiary designated. The plan document typically has a default, so it'll say if there is no beneficiary designation, the money goes to the spouse and if there's no spouse to, for example, the estate here, there wasn't no spouse and we had the children, but they wanted the money to go to the trust. But the trust was never designated as the beneficiary. So you can't just create beneficiary designations that, that don't exist or plan provisions that don't exist.
Sherrie Boutwell (41:01):
There is a process that I've seen some plans and beneficiaries use called a disclaimer. It's really a concept under gift and estate planning where a beneficiary disclaims a gift. And for tax purposes, you know, you've got to jump through certain hoops to do a proper disclaimer. It's not taxed to them. And I've seen plans use that in some circumstances where the wrong person was going to get the money. But I've also seen folks come with a beneficiary designation for example, that says, I want this to go to my trust and no spousal consent so it can just raise, you know, a lot of a lot of problems. And I would say, look at your plan documents, make sure you've got a plan document that you, you know, you like, you know, usually you're with the record keepers basic plan document, you're not going to get a lot of choice about that, but at least know what it says. And again, have a process. So if someone dies, you know and comes in making a request, you have a written process and most record keepers will be able to help you, you know, get that in line. And then if there's any question though that that is the time you really probably want to get some counsel in golf.
Rick Unser (42:25):
And what are you seeing these days as the, I don't know if best practices the right word or recommended practice that if you want to designate minors as a beneficiary, is there a good way to do that? Should you do that? Do you just designate the miners themselves? Is it, as you talked about with the trust perspective, is that a better way to do it? Because I feel like that's a question that comes up a lot from employers of Hey, I'm divorced, I'm a single parent, whatever. I don't have a sibling, I don't have anyone else. I just, it's me and my daughter or me and my son, whatever. W w what's the best way to make sure that if something happens to me, the money goes to them?
Sherrie Boutwell (43:10):
I can tell you that from a retirement plan law perspective, what you want is a a clear beneficiary designation. A family trust is ideal with proper consents, but if that's not possible, you don't have it set up yet. I don't see a problem with naming the children because you, who else are you going to name? Right? You don't know necessarily who the guardian of those children is going to be. Typically if you're married and one of you dies, the other parent is automatically the guardian. But what happens if both parents die or one parent is not capable of being the guardian and there have actually been guardianship proceedings initiated either by the state or another family member and most planned documents or some plan would have a provision that talks about conservatorships and guardianships. And what happens if someone is again lacking capacity either because they're a minor or because they just lack capacity for you know any number of reasons.
Sherrie Boutwell (44:15):
So you want to check your plan document and you want to make sure that if you have the wherewithal and Europe parent in that situation that you described, I would be talking to them. I, you know, whoever's helping me write my will, maybe my family lawyer if I'm going through a divorce and you know, make sure I'm getting this set up correctly because particularly where there are situations where there are multiple marriages and children from different marriages or children from a first marriage and a new spouse. That spouse has got rights under the law that quite apart from any state law or anything that you think you've agreed to informally that need to be taken into account
Rick Unser (45:00):
And let's just say that an employer wants to wait into that and I know that there's a lot of employers that are doing beneficiary campaigns are really trying to get more beneficiary forms on file and in these days I feel like that's just more of a reality based on the prevalence of automatic enrollment and people that are accumulating balances and getting employer contributions through the match by them not proactively enrolling on their own. Would it make sense for them to have an estate planning attorney or someone akin to that to talk through some of those things that are beyond the, Oh yeah. You know, you want to leave everything to your spouse. Perfect. You know, that's, that's pretty clean and simple. But you know, to your point, if there are more complex questions, is that more of an estate issue versus a retirement issue? Right.
Sherrie Boutwell (45:55):
Well, I will tell you that a number of our clients, you know, they do education campaigns on a variety of topics for their 401k plans. And I've seen them do a session on estate planning and your 401k plan, for example, where they cover these issues as well as the capacity issues that I was describing. Because sometimes it's not that the person died, it's that they have lost capacity to make their own decisions. And sometimes it's really tough, you know, from the plan administrators standpoint, if you have a, a spouse come to you and they need that money but they don't have anything appointing them as you know, a power of attorney and now they're saying I need money to take care of the participants but no power of attorney, you know, that puts the plan administrator in a very tough position of well you, you don't seem to have a sorority to pull any money out of this plan. You know, we've helped clients work through that but it's very facts and circumstances based, you know, making decisions about what kinds of risks and looking in particular at the specific provisions in the plan documents.
Rick Unser (47:14):
Before I pivot you one last time, anything else around beneficiaries, people that pass away in workplace retirement plans or become incapacitated that we should chat about?
Sherrie Boutwell (47:27):
I would say this certainly right now during this market volatility, think about if you have someone that you are aware is not, is incapacitated or you know, for some reason nobody's taking charge of that account balance. Is there some requirement that the plan administrator be paying attention? Now hopefully you've already made this decision, right? You've thought of this on the front end. You have your default fund, you've thought that out in a prudent way and you don't have to do anything other than go, yeah, we think we did this right and we're not second guessing ourselves now, but right now if someone's not managing an account and they didn't have it, well diversified, just you may want to think, especially again if it's a large account balance, you're aware that the person is sick. Pay attention to whether they're, you have some duty at this point to be doing something about that account.
Sherrie Boutwell (48:33):
We certainly have seen a couple of clients that were heading into blackout periods this month, you know, put those off just because the volatility is so crazy right now. And then think about this. If you are a hospital for example, and your employees right now are on the front lines and very distracted, do you want to be forcing them to be making a bunch of decisions, for example, on a blackout or something like that? This is the time to really take step back, take a step back and think through what are my obligations? Is this a good time for this and what capacity do my participants have? As you know, there's a lot often missing participants that are not going to be getting any of these notices that you're now sending out saying you can get a coat at 19 distribution because they're missing and they have been missing and you don't have a good address for them.
Rick Unser (49:35):
Well, and that's a perfect segue because that was the last thing that I wanted to pick your brain about is it seems like that topic missing participants has been a pretty big focus of the department of labor. We've had a few clients that have gotten inquiries from the department of labor on what their policies are around missing participants. What does it mean when you have a missing participant? How does a participant go missing? What do you have to do to find them? And I guess, what are some of the best practices or concerns that the department of labor has there and why it's become a focus for them?
Sherrie Boutwell (50:14):
Right. Well, we could do a whole hour on missing participants so we won't do that today. But just as with you and I'll certainly, we also see that this is a focus of the department of labor, both missing participants and in a few cases missing planned sponsors where it's just an orphan plan so you have orphaned on both sides. Right. And that often leads to missing participants because nobody's been trying to track these folks down. Nobody's, again, I'm going to circle back to the forced cash outs. Often these are small account balances that also were neglected and if you had contacted that participant in the first few months or a year after they terminated employment, you probably have a better shot of getting a good address and you know, tracking them down if you wait five or 10 years, less likely to be able to track them down.
Sherrie Boutwell (51:15):
What we're seeing though is that you know, if the employer steps up, some searches, pays the money to an IRA, if they can't find the person then from the enforcement side, they're not a big problem. They just trying to get everyone into compliance. Where we have seen more challenging situations is, let's just say, and it's rare anymore, but I mean it's not completely unheard of that you have some defined benefit or money purchase money that was rolled into a [inaudible] not rolled but you know transferred to a 401k's. You've got pension money that's subject to qualify joint survivor annuity requirements and they're small accounts and so you can't just force a cash out but you can't, you can't find the person, you can't get a spousal consent, can't get any consent and you can't just pay cash. Finding annuity providers for those little small account balances is also a challenge.
Sherrie Boutwell (52:19):
So I think the thing to do about that and you know without taking up an hour is you really want to be on top of this. You want to have a process and most of the record keepers, the bigger records keepers now will give you a lot of support in this. They'll actually, when you are negotiating your agreement with that record keeper, one of the papers that's often put in front of the plan sponsor administrator to sign is, Oh and we're going to use you or designated provider for forced cash out rollovers. Again, you know, you don't have to use the same company, although that's often convenient, but it is your duty as the plan fiduciary to think that through not just sign whatever you know gets put in front of you when you're signing up with a record keeper. And so I think that maybe is the best takeaway I can give is this is something you want to get out in front of and be proactive about with whoever's providing services to this plan so that you're not behind the eight ball. Now, you know, trying to track these people down and not being able to find them.
Rick Unser (53:40):
So if I'm hearing this and my plan has a reasonable amount of turnover just via the demographics that my businesses in, I mean missing participants is just going to be a strong likelihood of the demographic side of things. So I think what I'm hearing you say is acknowledge it, understand it, have a process to address it and maybe mitigate the number of participants that potentially go missing. But if you have some missing participants, you're not all of a sudden going to be subject to a DOL audit and a bunch of fines.
Sherrie Boutwell (54:19):
No, that's not what we're seeing. We're definitely not seeing signs. Right? We are seeing an emphasis from the department of labor on your process and if you haven't been following your process, getting, you know, on the train with that. The other concern that we see on the IRS side is you have a plan document. It says you're going to cash people out, but you didn't. That, you know, could be an operational failure to follow the terms of your plan document. So it can raise tax qualification issues as well. So you might be dealing with this on both sides. On the regulatory side, PBGC pretty much handles, if you've got a missing participant and you've got a plan termination, you can go to the PBGC. But where you have issues is you're not terminating a plan. You've got missing participants, they've got more than $5,000 in their account and you know, here you are, you know you can't send notices to them because they're bouncing back not a position you really want to find yourself in and hopefully the fewer dollars in that position, the lower the risk. Right. So being proactive is going to help.
Rick Unser (55:40):
I guess last question on that one and that's probably just a direct followup to what you said there. You've got somebody that you can't get out of the plan, you don't have a, a good way to, to contact them when is enough enough or when can you say, you know what, we've done everything we can. This person is buried their head in the ground and until they come up for air we're probably not going to find them. Is there a something that a plan sponsor can do that says, all right, somebody's looking at this from the outside would say yes, you've, you've done everything you can.
Sherrie Boutwell (56:16):
Well, I would say that's going to be very facts and circumstances based and I would assume if not terminating this plan that I have an ongoing duty to, you know, try to find this person they may pop up. Right? Just because it was going to a bad address and you know, you hired someone to help you do a search and you couldn't find them. Doesn't mean you can't find them next year. So unless it's a plan termination, I don't think your obligation to look for them just goes away and you're done in the context of a plan termination, you know it's another situation and you as a plan fiduciary implementing a plan termination need to pay attention to for example, to the size of the account balance and what would be a prudent process. You know, for a $6,000 account balance is going to be very different than a $200,000 account balance.
Sherrie Boutwell (57:20):
We once had a plan, this was a number of years ago. Facebook was still pretty new, so that's how long ago it was. But they had a participant with a $200,000 account balance and they had felt like they just exhausted their possibility of finding them. But as it turned out, someone knew someone who knew them on Facebook and sent them a message. They were out of the country and you know, they ended up finding them. So I would say that's very facts and circumstances based and how, how much you are, how much of a duty you have. It's going to depend in some part on you know, how much money is involved here and whether you're terminating a plan.
Rick Unser (58:06):
Well said there. I think in looking back on everything we talked about, I think we've accomplished our primary mission, which is to talk about coven divorce, death and 401k distributions. Dare I say, is there anything we missed or any parting shots you want to share before we go our separate ways.
Sherrie Boutwell (58:25):
I think right now this is such a dynamic situation. It is very important for plan administrators to stay informed. And I know you know, people have a lot on their plates, but there's a lot of money in 401k plans. And if you're a 401k plan fiduciary or administrator, it is really critical that you stay informed and read those emails that are coming in. Even though you know, maybe an email from your record keeper is not the first thing you always jump at. Right now, you've got to be on top of this because it's changing literally every day. I think I shared, you know, I was trying to write an article on this for our newsletter and every day I had to change it or a couple of weeks. So stay informed right now is the best thing I can, I can close with, I think.
Rick Unser (59:18):
Perfect. Well, in closing I would say thank you. It was great to have you back and certainly as times change and evolve and we find other fun things to talk about, I would love to have you back again. So thanks for being here.
Sherrie Boutwell (59:31):
Oh, thank you. Thanks so much, Rick.